A summary of a key business valuation method, current EBITDA multiples, the drivers that influence the value of a business and how to increase the value of a business

1. Value Drivers and
Maximising Business Value
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2. State of Australian Business
• 80% of all businesses generate revenue less than $500k
• Less than 7% of all businesses exceed revenue of $2m
• The average EBITDA margin of all businesses is 14.5%
• More than 80% of businesses generating less than $2m will sell
for a multiple of 2.0x EBITDA
• What does this mean?
• The majority of SME’s are worth less than
$150k
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3. What Should Our Goal Be?
• If business owners wish to retire on the wealth of their business then
we should be targeting SME valuations of $1m+
– Revenue in excess of $1m - $2m pa
– Average EBITDA margin of 20% - 40%
– EBITDA multiple of 2.5x - 3.0x
• How do we go from an expected valuation of $145k to $1m+?
• Relentlessly implementing the five key drivers of highly valuable
businesses
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4. What Is Value?
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• Value of a business:
– Net present value of future cash flows.
– Benefit of ownership.
– Value created in excess of the cost of capital.
• If someone says “The value is whatever the market is
prepared to pay” – it means they don’t know the value.

5. Why Is Value So Important?
• Value is the only metric that measures:
– Cash flow (and hence profits)
– Capital investment
– Cost of capital
– Risk
• Used to make decisions:
– Buy or sell
– Settle disputes
– Investment
– Performance measurement
• It is one of the primary reasons you go into business –
to increase wealth
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6. Valuation P’s & Q’s
• Assumption:
– A business is making sufficient free cash flow that, when capitalised at a suitable cost of
capital, results in a market value greater than book (or balance sheet) value.
– Otherwise the value of the business is based on asset value.
• The Market Value of the Enterprise (EV) = P * Q
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EV = EBITDA Multiple * Adjusted EBITDA
• Measure of risk
• 80% of SME’s with turnover less than
$2m transacted at 2.0x EBIT or less
• EBIT or EBITDA as a proxy for cash flow
• Adjusted for one-off’s, non-operational
items, “normalised”, working capital
and investment

7. So What Increases Value?
• From the P’s and Q’s equation, actions that substantially increase:
– Adjusted EBITDA
– The EBITDA Multiple
• In most cases, improving one (EBITDA or Multiple) will also improve the
other.
– We often find the biggest factor that limits any increase in business value is a lack of planned action.
– Having a strategy is important – but so is implementing that strategy
• We find the most effective actions are usually associated with five key
features:
– Size and scale
– Reliance on key persons / Systems and processes
– Innovation and technology
– Management reporting
– Financial results
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8. How does the multiple vary across different
businesses?
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9. Private Company Multiples
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• Actual Transactions in Exit
Value Advisers Database
• Low Multiple : 2.7x
• Average: 3.6x
• High Multiple: 4.2x
• Actual Transactions in Exit
Value Advisers Database
• Low Multiple : 3.2x
• Average: 4.5x
• High Multiple: 5.7x

10. Private Company Multiples
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• Private company sector: Multiples much wider spread
• As low as 1.0x and as high as 5.7x
• Size counts
• Industry also influences mutliple – retail attracts lower multiples
than others
• Database has a skew to technology, IT and manufacturing
businesses, which has shifted multiples higher than for other
industries
• Services based businesses can still attract “high” multiples
• For EV up to $5m: Multiple range 0.7x – 3.9x
• For EV up to $20m: Highest multiple increases to 4.7x

11. Private Company Multiples
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• EBITDA Multiples can be scattered
• Very industry dependent
• Size counts
• Highly correlated to “buyer requirements” – synergies, objectives, skills

12. Valuation Drivers - Practice
• Size and scale matters when it comes to valuation
– Requires EVIDENCE of revenue growth / trends greater than industry expectations
– Scale must be tested / proven
– “High” revenue leads to more growth opportunities:
• Leveraging existing customer base to expand into new related markets.
• Adding new products and services.
• Improved market share by doing things better such as customer management, service,
delivery or other key market features.
– Industries showing highest growth rates (+4% pa) in FY17:
• Services industries
• Health care
• Wholesale trade
• Delivers higher EBITDA results and higher multiple
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13. Valuation Drivers - Practice
• Reliance on key persons / Systems and processes
– Business processes and systems clearly documented
– Automated IT systems in place
– Where appropriate and possible, systems in place to automate / control
sales and/or operations.
– A clear staff structure
– Key IP should be shared and/or available to other staff members.
– Customer and/or supplier relationships should be exposed to multiple
people to ensure no one person has complete control
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14. Valuation Drivers - Practice
• Innovation and technology
– Technology of itself does not create high levels of value.
– Has it been effectively implemented across the business and does it result in
increased performance?
– Key features:
• Placement of orders via an enterprise system, communicating scheduling and production
information to manufacturing department.
• Real-time monitoring of production and delivery.
• Real-time or online management of quality information and customer feedback.
• Collation of sales, operations, quality and customer feedback into management reports.
• Integration across business adds to multiple significantly because it
substantiates scale and growth
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15. Valuation Drivers - Practice
• Management reporting
– Without adequate and effective reporting and the use of reporting a
business is flying blind and presents a high level of risk.
– Minimum expected
• Financial reports (P&L and Balance Sheet)
• Readily available (less than 24 hours or preferably instant)
• Covers sales by key product/service or customers
• Quality/service trends
• Operational capacity
• Business management & governance (regular reports with circulated minutes and action
plans that move)
• Some form of business planning - documented
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16. Valuation Drivers - Practice
• Financial results
– Typically look for EBITDA margins > 10% (very industry
specific) and post market level wages to owner
– Prefer revenue growth 5%+ but steady of cyclic is ok
– Positive net assets (although this is not always critical,
especially in service-based businesses)
– Adjustments for one-off or non-operating items
• One-off legal or accounting bills
• Relocation
• R&D that may be specific to developing IP (not always)
• “Home office” expenses
• Personal expenses
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17. Final Point
• Whilst it is not compulsory to have ALL of the features
below to generate highly valuable business – ALL of the
highly valuable businesses I have seen have most or ALL of
these features:
– Proactive, people focused, inclusive culture
– Well developed and documented systems in most areas of the
business
– Some form of technology or innovation that gives them an edge
– A structure in place (even for a 2 person business –the key roles
are clearly defined and measured)
– Detailed reporting with actionable items
– A documented plan that is reviewed regularly
• In my experience it is these features that lead to great
financial results and value.
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18. How can you attract higher multiples?
• Example of recent transaction:
– St David Dairy Pty Ltd sold to private investors for $15.4m with FY17
reported EBITDA of $1.35m
– An Enterprise Value:EBITDA multiple of 11.4x
– The buyers have a plan on how to leverage the products and networks of St
David Dairy
• They have synergies that will result in higher EBITDA
• So they were prepared to pay a premium – representing STRATEGIC value
• What is Strategic Value and how do you achieve a strategic sale?
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19. What Is Strategic Value?
• Market value: What ANYONE ELSE will pay?
– Arm’s length transaction
– Open market
– Not anxious buyer and seller
– All information available
– Typically is the lowest common denominator when it comes to price
• Strategic Value: What will A PARTICULAR PARTY pay?
– Takes into account synergies particular to buyer and seller
– Willingness to pay a premium for something intangible
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20. Strategic Buyer Benefit
• Extra value from creating a strategic opportunity
– Create partnerships and strategic relationships
– New products, services, operational capacity, new
markets
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21. Finding a Strategic Buyer?
• Strategic Buyers:
– Typically have dealt with you or at least be well aware of you.
– Can be in “side or related” industry segments.
– MAY be larger than your business but not always
– Can take longer to find and cultivate
– Are buying into your business plan (or a portion of it).
– Will have specific reasons for the acquisition or merger.
• Usually not looking for any silver bullet:
– Want to buy into something established that leverages their position.
– Will sometimes be IP focused but not always.
– Will want a reasonable business model – must have a plan
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22. What Can You Do Next?
• Most critical step is to understand your current
valuation
• Then develop a plan to increase the value:
– Understand the gap between current value and desired value
– Identify opportunities for improvement
– Identify potential buyers and strategic partnership
opportunities
– Document an action plan
• Execution will trump strategy every time – you can
have a perfect strategy that you never implement or
you can take action now and improve the strategy as
you go.
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23. Who Is Exit Value Advisers?
• We are private company valuation specialists that help
owners find strategic buyers.
– Value is at the heart of all successful businesses.
• Valuing privately held businesses for:
– Buying or selling
– Commercial disputes and family law matters
– Investment
– Restructuring
• MBA (Corp Finance), B App Sc
– 12 years in manufacturing and mining
– 18 years consulting
– 10 years valuing privately held businesses
• Personally invested and sold several businesses
– Am an active investor in two businesses presently
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24. Disclaimer & Reliance on Information
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• This publication contains general information and is not intended to be
comprehensive nor to provide financial, investment, legal, tax or other
professional advice or services.
• This publication is not a substitute for such professional advice or
services, and it should not be acted on or relied upon or used as a
basis for any investment or other decision or action that may affect
you or your business.
• Before taking any such decision, you should consult a suitably
qualified professional adviser.
• Whilst reasonable effort has been made to ensure the accuracy of the
information contained in this publication, this cannot be guaranteed
and neither Exit Value Advisers nor any of its associates or other
related entity shall have any liability to any person or entity which
relies on the information contained in this publication, including
incidental or consequential damages arising from errors or omissions.
• Any such reliance is solely at the user’s risk.

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Thank you
Email - m.williams@exitvalue.com.au
www.exitvalue.com.au